torsdag 15 juli 2010

The tumour on the economy

Financial services are mostly parasitic on the real economy since they produce nothing.

The main functions of a bank are

to provide cash handling and payment services

to hold deposits safely

to arrange credit

The first two are obvious. The third is to facilitate production eg in a simple rural economy the farmer needs to buy seeds and live, in reality on the previous year's production, until the crop is harvested and sold. This is why credit is needed, and it is extinguished at the end of the production cycle.

The main cost on this is an administrative one of setting up the credit. There is also a need to make provisions against possible default, but that is an insurance function. Not only is there no necessity to charge interest or insist on collate, the practice is positively dangerous, especially when land is accepted as collateral for the credit.

Banks should not act as moneylenders, nor should they give credit for anything other than to facilitate the physical process of production. This it is right for banks to give credit for the purchase of seeds, tools and for the payment of the the farmers' sustenance over the season. It is not right that banks should give credit for land purchase because that has added nothing to the overall productive power of the economy (the land was there from time immemorial, all that has happened through land purchase is that a release fee has been paid to a land owner to enable its use).

Surgery no answerIf these principles were followed, the financial services sector would be a small specialist profession. Anything more is a malignant tumour on the body of the economy. But surgery is no solution. The underlying cause of the disease must be dealt with.